Republic of Congo: 2019 Article IV Consultation—Press Release; Staff Report; and Statement by the Executive Director for the Republic of Congo
Author: International Monetary Fund. African Dept.
Publication Date:
27 Jan 2020
eISBN:
9781513527970
ISBN:
9781513527970
Language:
English
Keywords:
ISCR; CR; authority; country; spending; reform agenda; oil revenue; Congolese authorities; growth prospect; debt vulnerability; Arrears; Fiscal stance; Global; Central Africa; Sub-Saharan Africa; financing gap; oil GDP; clearance strategy; debt restructuring; Oil; gas and mining taxes; oil-prepurchased debt
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2019 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Congo

Abstract

2019 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Congo

Background

1. The political environment remains relatively calm. At the same time, while there are no signs of social instability or recurrent protests, civil society remains vocal about the governance challenges facing the country.

2. The ECF-supported program was approved in July and the authorities have taken steps toward its effective implementation. In particular, the prudent execution of the 2019 budget and the preparation of a 2020 budget consistent with the main program parameters are welcome steps toward restoring fiscal sustainability. In addition, the authorities have made progress to advance key structural reforms, including those that target improvements in governance, though some reforms have experienced delays.

3. At the same time, the authorities need more time to conclude the debt restructuring process of commercial debt (mainly involving oil traders) and to clear official external arrears. The authorities remain committed to completing the debt restructuring process for external commercial debt in line with program parameters and clearing official external arrears ahead of the first review under the ECF arrangement in line with their earlier commitments. Negotiations to conclude a debt restructuring agreement consistent with the objective of restoring debt sustainability intensified in November/December and the authorities remain confident that an agreement can be achieved in 2020Q1. The authorities also expect that the upcoming disbursements of budget support will help clear the full amount of external official arrears of about USD$181 million at end-September (1.7 percent of GDP). In the meantime, given the fact that the last Article IV consultation was completed in 2015, this report focuses on the completion of the 2019 Article IV discussions.

Recent Economic Developments

4. Overall growth for 2019 has been revised down to 2.2 percent (from 5.4 percent in the original ECF-supported program request). This revision is almost entirely explained by a lower-than-expected expansion in oil production (Table 1, Text Figure 1). While the expansion in oil production is on track for most oil fields, temporary technical disruptions in two oil fields have left the initial target out of reach. The expansion in oil production continues to be substantial, as oil production has been increasing steadily since 2015, with a particularly large increase of over 20 percent in 2018. The authorities had expected production to increase by a similar amount in 2019 but the projected increase is now more likely to take two years, with Congo reaching peak oil production of around 140 million barrels in 2020. Production is then expected to decline gradually as oil fields reach maturity.

Table 1.

Republic of Congo: Selected Economic and Financial Indicators, 2017–24

article image
Sources: Congolese authorities; and IMF staff estimates and projections.

Revenue excluding grants minus total expenditures (excluding interest payments and foreign-financed public investment).

Overall balance minus 20 percent of oil revenues and minus 80 percent of the oil revenue in excess of the average observed during the three previous years.

Before IMF-ECF financing, other expected financing and exceptional financing due to external debt restructuring net of restructured contingent liabilities.

Text Figure 1.
Text Figure 1.

Republic of Congo: Oil Production

(Millions of Barrels)

Citation: IMF Staff Country Reports 2020, 026; 10.5089/9781513527970.002.A001

Sources: Congolese authorities and IMF staff calculations

5. Non-oil growth is expected to turn moderately positive in 2019. While the growth rate of the non-oil economy is likely to remain modest (i.e. slightly below 1 percent), this could still be a positive development and a sign of stability after the non-oil economy experienced a deep recession over the last three years. (Text Figure 2). However, the overall level of growth of the non-oil economy will be driven by the performance of the agricultural and transportation sectors, while many other economic sectors remain in recession.

Text Figure 2.
Text Figure 2.

Republic of Congo: GDP Growth

Citation: IMF Staff Country Reports 2020, 026; 10.5089/9781513527970.002.A001

Sources: Congolese authorities and IMF staff calculations.

6. Inflation remains at moderate levels. Overall inflation has remained subdued at 1.8 (y/y) at end-October and is expected to remain around 2 percent by year-end. Food prices have declined by about 0.3 percent over the last 12 months, while non-food inflation was up by 4.1 percent over the same period (Figure 1).

Figure 1.
Figure 1.
Figure 1.

Republic of Congo: Recent Economic Developments, 2010–19

Citation: IMF Staff Country Reports 2020, 026; 10.5089/9781513527970.002.A001

Sources: Congolese authorities and IMF staff calculations.

7. The substantial improvement in the overall fiscal position observed in 2018 has continued in 2019. The overall fiscal balance had improved sharply from a deficit of about 7½ percent of GDP in 2017 to a surplus of 6½ percent of GDP in 2018. This surplus could reach 8¾ percent of GDP in 2019 if the trends observed up to 2019Q2 continue. The non-oil primary deficit (in percent of non-oil GDP), which excludes oil revenues and therefore provides a better measure of the authorities’ fiscal effort is also following a positive trend. Indeed, the deficit is expected to improve from 28.1 to 24.8 percent of non-oil GDP between 2018 and 2019. Fiscal performance was driven by a cautious execution of spending as the government followed a prudent policy of freezing about 20 percent of the overall spending appropriations. However, social spending levels remain low and non-oil revenues were about 2 percent below target at end-June, and this is an area that requires particular attention (see discussion below).

Text Figure 3.
Text Figure 3.

Republic of Congo: Non-Oil Primary Balance

(Percent of non-oil GDP)

Citation: IMF Staff Country Reports 2020, 026; 10.5089/9781513527970.002.A001

Sources: Congolese authorities and IMF staff calculations.

8. The external current account is expected to record a substantial surplus for a second year in a row. After registering large deficits that exceeded 50 percent of GDP over the 2015–16 period, the current account balance reached a surplus of about 7¼ percent of GDP in 2018. This surplus is expected to continue in 2019 and reach about 8 percent of GDP. The main factors driving the improvement are the recovery in oil exports and new mining exports coming on stream.

Text Figure 4.
Text Figure 4.

Republic of Congo: External Current Account Balance

(Percent of GDP)

Citation: IMF Staff Country Reports 2020, 026; 10.5089/9781513527970.002.A001

Sources: Congolese authorities and IMF staff calculations.

9. Net foreign assets are improving faster than expected as a result of the stronger current account and the impact of the new FX regulations introduced by Regional Central Bank (Banque des Etats de l’Afrique Centrale) (BEAC). In 2019Q3, net foreign assets imputed to the Republic of Congo reached CFAF 476bn — 89 percent higher than at end-2018. While this level is still low and would cover only about 1½ months of imports, the change in the trend is positive as it provides a sense of stability in the country and shows that Congo is also contributing to a faster pace of reserve accumulation at the CEMAC regional level compared with earlier projections. The expansion in net foreign assets has also been associated with an increase in liquidity. Broad money increased by 12 percent y/y, but this has resulted in higher levels of bank reserves at BEAC, rather than more lending to the economy. Credit to the private sector in September was down by about 9½ percent (y/y).

10. Despite recent improvements, the overall external position is weaker than warranted by fundamentals and desired policy settings, necessitating policy adjustment to close external gaps. A quantitative assessment of the external position tailored to exporters of non-renewable resources suggests that the current account is around 17 percent below the norm in the medium term, driven by the fact that proven oil reserves will be exhausted in about 25 years and the country has not accumulated sufficient assets so far. The same methodology suggests the exchange rate is overvalued by about 15 percent. Closing external gaps can be achieved if the authorities adjust the non-oil primary balance as projected under the baseline scenario. In addition, there is a need to enhance structural competitiveness through improvements in the business environment, and to increase diversification efforts. The steady implementation of structural reforms—including those under the ECF arrangement—is essential to create an enabling environment for private sector development and economic diversification.

11. The banking sector remains solvent, but is under stress due to rising NPL levels. This is due mainly to the deterioration on the asset side of banks’ balance sheets associated with declining economic activity and insufficient progress in reducing public sector arrears to government suppliers. As a result, NPLs are still high and rising to 24 percent of gross loans. This is having a negative impact on some economic sectors; in particular, the construction and parts of the tertiary sector.

Outlook and Risks

12. The short-term outlook remains challenging though there are early signs of stabilization and recovery. In the near term, the expansion in oil production accounts for a large share of the projected recovery in growth, though the increase in production could be slower than expected if there are new technical issues associated with a key oil field (Banga-Kayo). The authorities noted that the technical issues had been resolved and the increase in production will resume in 2020 as planned.1 In addition,

  • Non-oil growth is expected to pick up gradually as the government starts to implement its domestic arrears clearance strategy, which should help boost confidence and support credit growth.

  • The overall fiscal surplus over 2019–20 is projected to exceed 8 percent of GDP, with relatively strong oil revenues as higher prices offset the downward revision in production. It is expected to remain close to this level over the medium-term, thus maintaining public debt on its downward trajectory and contributing to the accumulation of government deposits and reserves at the BEAC.

  • The external current account surplus is expected to remain high in 2019–20, but decline gradually as oil production declines from short-term peaks. At the same time, fiscal consolidation and the accumulation of deposits at BEAC will support external adjustment efforts.

13. Congo is considered in debt distress due to the accumulated external and domestic arrears. External payment arrears have increased in recent years as financial difficulties have prevented Congo from servicing its debt; by September 2019, Congo had accumulated USD$181 million in official bilateral external arrears, in addition to the stock of unrestructured pre-HIPC arrears. Moreover, Congo has also accumulated substantial external commercial arrears with oil traders, as well as domestic arrears. The total public debt level at the end-September 2019 was estimated at 87.8 percent of GDP, with external public debt at 62.3 percent of GDP, of which about 20 percent of GDP was in arrears. Debt is assessed to be unsustainable, absent restructuring (see DSA). In 2019, the present value (PV) of total public debt is 74 percent of GDP, while the PV of external debt is 52 percent of GDP, well above sustainability benchmarks. High debt service also continues to present challenges, with the debt-service-to-revenue ratio at 37 percent, and the debt-service to exports ratio at 14 percent, above sustainability benchmarks. Debt burden indicators are projected to worsen in the near term (2020–21).

14. Risks to domestic economic stability come from both external and domestic sources. In particular,

  • Global Risks. The first source of external risk comes from large swings in energy prices. Current levels of around $60 per barrel are still above the authorities’ assumption of $55 in their 2020 budget. While risks to prices appear broadly balanced, elevated price volatility can complicate economic management given limited buffers and financing options. A second source of external risk would be weaker than expected global growth, which could affect oil prices but also FDI and non-oil exports thereby undermining efforts to diversify the economy.

  • Country-Specific Risks. The first source of domestic risk is political. The government’s ability to maintain political stability depends on the performance of the economy, and the authorities’ capacity to deliver on key reforms, especially those associated with good governance and transparency, clearance of domestic arrears and social spending. Failure to implement these reforms could erode public confidence in the government’s economic program. At the same time, the main economic risk is the authorities’ potential difficulty to sustain large primary surpluses over time, which will require difficult reforms to boost non-oil revenues, control spending on subsidies and introduce a stronger mechanism to monitor fiscal risks. Lower-than-expected private investment in the medium term could also have a negative impact on non-oil growth.2

  • Other Risks. Other risks to the outlook include possible delays in the disbursement of budget support from key development partners, which would complicate budget management and make it difficult for the authorities to clear official external arrears, while delays in the completion of the debt restructuring process for commercial debt would generate doubts about Congo’s debt sustainability and negatively affect confidence and investment.

Status of the ECF-Supported Program

The IMF Board approved a three-year ECF arrangement on July 11, 2019. The arrangement gives Congo access to SDR 324 million (about $446.7 million) representing 200 percent of quota. A first disbursement of SDR 32.4 million (about $44.7 million) was made upon program approval. The ECF-supported program seeks to help Congo restore fiscal sustainability through strong fiscal consolidation and the authorities’ efforts to restructure debt, improve governance (including PFM) to promote a more transparent and efficient use of public resources, and protect vulnerable groups from the burden of adjustment. The program also aims to support regional stabilization efforts in the Central African Economic and Monetary Community (CEMAC) monetary union.

Performance at end-June was mixed. The two quantitative fiscal targets at end-June (floor on the basic non-oil primary balance, and the ceiling on net domestic financing to the government) were met. In addition, the PCs setting zero ceilings on non-concessional financing, and new external financing guaranteed with future natural resource revenues were also met. But the government accumulated new external arrears with official creditors (about USD20 million) due in part to delays in budget support, and hence the continuous PC on external arrears was missed. At the same time, the three ITs on poverty-reducing spending, non-oil revenues, and disbursements of external loans for investment projects were missed, though the latter two by small margins. On the structural front, the government has made progress on the key benchmarks to improve governance with the preparation of implementation decrees associated with the Transparency Commission, and the Anti-Corruption High Authority, but some reforms (e.g. adoption of a privatization strategy, and decision to implement an automatic fuel pricing mechanism) are experiencing delays.

With the recent submission to Parliament of an adequate 2020 Budget, the macroeconomic framework underlying the program remains adequate. Staff and the authorities have also reached understandings regarding the set of policies needed to complete the first review, including new critical PFM reforms to ensure that budget execution is closed in a timely manner, and spending from previous budget years is audited by the Audit Court (see below). The postponement of the first review is needed to allow staff more time to obtain credible assurances and be sufficiently confident that the authorities’ plans on debt restructuring will be concluded on terms consistent with restoring public debt sustainability. In this regard, the authorities remain committed to completing the debt restructuring process for external commercial debt in line with program parameters, and clearing official external arrears in line with earlier commitments ahead of the first review under the ECF arrangement.

Policy Discussions

15. Policy discussions revolved around three key topics that are aligned with the priorities of the ECF arrangement, as well as the medium-term challenges identified by the authorities in their 5-year development plan. In particular, discussions focused on (i) the strategy to restore debt sustainability, (ii) structural reforms to foster good governance and tackle corruption, and (iii) policies needed to improve the business environment and prospects for economic diversification to sustain non-oil growth.

A. Policy Theme 1: Fiscal Sustainability and Social Protection

16. Restoring fiscal sustainability is the first pillar and a key objective of the authorities’ medium-term plans. The decline in public debt of about 30 percent of GDP observed in 2018 was impressive, but sustained efforts are needed to reach the program objective of reducing the net present value of external debt below 30 percent of GDP by 2023 to achieve a moderate level of debt distress.

17. Staff emphasized the importance of reducing the non-oil primary deficit to about 25 percent of non-oil GDP in 2019 and pursuing the adjustment toward 15 percent by 2023–24. This represents an adjustment of about 3 percentage points in 2019, and an additional average adjustment of about 2 percent of non-oil GDP per year over the projection period. This represents a rather tight fiscal stance because it approximates a conservative Permanent Income Hypothesis (PIH) rule. This rule is not necessarily an optimal rule for low income countries with large development needs, but it may be necessary when the resource horizon is short, and there are high levels of debt and a poor track record of public investment management.3 The implementation of this fiscal strategy would place public debt on a strong downward path and allow Congo to rebuild its fiscal and external buffers. In particular, imputed net foreign assets would triple to cover about 4 months of imports.

18. The fiscal strategy relies on reforms to boost domestic revenue mobilization and efforts to contain current spending. Non-oil revenues would increase by 4.6 percent of non-oil GDP in 2020, with further annual increases of about 1 percent of non-oil GDP per year over 2021–22, before stabilizing at around 34½ percent by 2023. Staff noted that there was substantial potential to increase non-oil revenues in the short-term given the large stock of tax arrears,4 and the plans to curb tax exemptions (see related Selected Issues Paper (SIP), chapters on Non-oil Revenue Mobilization and on Fuel Price Subsidies). Overall primary spending levels would not decline substantially given the strong contraction already observed since 2016. However, staff noted that it would be important to pursue efforts to contain the wage bill as well as transfer and subsidies (see SIP chapter on Fuel Price Subsidies) so that fiscal space is generated to support an expansion in public investment. Most of the fiscal consolidation process has so far relied in deep cuts in the investment budget, which fell to 5½ percent of non-oil GDP in 2018. The authorities’ efforts to generate savings in current spending would help expand public investment toward 13 percent of non-oil GDP by 2023.

Text Figure 5.
Text Figure 5.

Republic of Congo: Composition of Fiscal Consolidation Efforts

(Percentage of non-oil GDP)

Citation: IMF Staff Country Reports 2020, 026; 10.5089/9781513527970.002.A001

Sources: Congolese authorities and IMF staff calculations.

19. The implementation of the fiscal strategy would contribute to a strong reduction in public debt, but it would not be sufficient to restore sustainability in the medium term. Absent additional debt restructuring, the PV of external debt to GDP would remain above the sustainability threshold of 30 percent for the next decade (see Text Figure 6 and Debt Sustainability Assessment).5 While liquidity indicators are projected to decline below their indicative thresholds by 2023, the debt service to revenue indicator exhibits significant breaches over the next three years. Moreover, liquidity indicators remain strongly susceptible to potential shocks; a shock to exports would cause the external debt-service-to-exports ratio to breach its threshold after 2025, while a depreciation shock would cause the external debt-service to revenue ratio to remain above its threshold in the medium term. In addition to the clearance of arrears necessary to end debt distress, the restructuring process of external commercial debt is thus essential to ensuring debt sustainability over the medium term.

Text Figure 6.
Text Figure 6.

Republic of Congo: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2019–29

Citation: IMF Staff Country Reports 2020, 026; 10.5089/9781513527970.002.A001

Sources: Congolese authorities and IMF staff estimates and projections.

20. The finalization of the plan to clear domestic arrears is also a key element of the fiscal strategy that will require immediate attention. As noted above, non-performing loans had increased to about 24 percent of gross loans by end-September and this is largely explained by the difficulties private sector companies are experiencing to service their loans due to the arrears the Treasury has accumulated over time with government suppliers. The stock of domestic arrears at end-2018 is estimated at about 14½ percent of GDP, though this figure may decline once the second phase of the independent audit is finalized. If a sufficient stock of gross claims is rejected by the auditor, there would not be a need for the authorities to restructure their domestic debt to restore debt sustainability.6 Discussions also focused on the need to avoid using Treasury resources initially planned for this year to settle arrears that had not been properly recorded in previous years, and to strengthen commitment control and cash management to prevent the appearance of new arrears (see discussion below on PFM issues, and SIP chapter on Improving Governance).

21. Staff expressed concern about the low rate of execution of social spending. At end June 2019, the authorities had only spent about 1/3 of the level of social spending allocated to critical social programs, including health, education and cash transfers to poor households. Staff noted that increasing social spending was necessary to ensure that vulnerable groups were being effectively protected from the burden of fiscal adjustment, including through the expansion of the cash transfer system and the allocation of budgetary resources to support women (e.g. training centers and combating gender-based violence). While delays in budget support may partly explain the low level of social spending, staff also noted that weaknesses in PFM, especially the use of Treasury resources to settle spending from previous years, played an important role (see below).

22. The authorities should also develop contingency plans in case key fiscal risks materialize. The fiscal position in 2020 may be at risk if (i) non-oil revenues underperform relative to the ambitious target, (ii) oil production does not ramp up to 140 million barrels as expected, or (iii) efforts to contain non-priority spending take more time. To offset these risks, the authorities need to speed up efforts to recover the existing stock of tax arrears and curb tax exemptions by ensuring that the Tax and Custom Directorates have adequate resources to conclude these tasks effectively. In addition, ensuring adequate social spending levels and stronger outreach efforts could help build a constituency in favor of reforms to contain non-priority spending (for example fuel subsidies and oil-related transfers).

Authorities’ Views

23. The authorities indicated that they continue to pursue an ambitious fiscal consolidation plan. They explained that they have followed prudent fiscal policies over the last few years, emphasized the rigorous implementation of agreed fiscal plans for 2019, and stressed the submission to Parliament of a 2020 Budget in line with the medium-term objectives recommended by the IMF.

24. The authorities agreed that the success of the fiscal consolidation strategy largely relies on reforms to boost non-oil revenue collections. In this regard, they pointed to a series of ongoing reforms that could help achieve revenue targets, including a set of legislative and administrative measures, the creation of a Fiscal Policy unit, stronger controls on tax exemptions and tax arrears, and efforts to modernize tax and customs administration through the interconnection between the Customs Directorate, the General Directorate for Domestic Taxes, and the Treasury. This interconnection will facilitate the monitoring of taxes due (with the issuances of tax liabilities prepared by the customs and domestic tax directorates), and the effective payment and tax collection controlled by the Treasury. Tax officials also indicated that they were in the process of reviewing the system of tax exemptions, including for imports of fuel products for the domestic market, to ensure that ad hoc tax exemptions that were granted without clear legal base are eliminated (see SIP chapter on Fuel Price Subsidies). They also noted that in some cases private sector companies will lose the initial tax exemptions that they had been granted because they did not respect contractual commitments, for example on the level of investment they had agreed to bring to the country.7

25. The authorities also noted that they plan to continue containing current spending and pursuing debt restructuring efforts with commercial creditors. They indicated that they had introduced a new system to control transfers to the oil refinery CORAF in line with an earlier request from Parliament and this was already generating substantial savings for the budget. Despite the additional fiscal space that this may generate for public investment, the authorities cautioned that the fiscal position was tight, which created political economy challenges to defend the government strategy in Parliament. As regards the debt restructuring process of external commercial debt, the authorities highlighted that this was crucial to restore debt sustainability. They noted that they had sent new letters to external creditors, mainly the oil traders, inviting them to accelerate the negotiations to reach a deal compatible with their program objectives.

26. With respect to domestic arrears, the authorities indicated that the initial estimates are likely to decline once the results of the second audit are finalized. They reiterated their intention to proceed with the payment of the arrears that have already been audited. This would be done through the issuance of 5–7-year debt certificates that private sector agents could discount in the banking sector if they need faster access to liquidity. The authorities also agreed on the need to accelerate social spending levels, but expressed disappointment that delays in disbursements of expected budget support had contributed to the observed underperformance in this area. They also indicated that they are considering improvements in the system to track priority spending, and noted that the installation of a new expenditure-tracking software (SIGFIP) in 2020 would play a key role in this regard.

B. Policy Theme 2: Fostering Good Governance and Tackling Corruption

27. The authorities have recently demonstrated a commitment to improving governance, as a necessary precondition to achieve more inclusive growth. At the same time, there is recognition that additional reforms are needed in a number of areas, including rule of law, PFM systems, financial sector oversight, market regulation, and business climate.

28. Congo has taken important steps to improve governance. The authorities first published a diagnostic report on Governance, prepared with the assistance from IMF staff, that identified all the key areas of weakness that required reforms (see SIP chapter on Improving Governance). The main reforms so far have covered the following areas:

  • Strengthening of the Anti-Corruption Framework. This objective has been advanced via the adoption of (i) a new asset declaration law for senior government officials, and (ii) the establishment of a High Authority on Corruption with investigative powers, and a Transparency Commission with civil society participation.

  • Greater transparency in oil revenue management. The authorities took several initiatives in this area including the publication of oil reconciliation reports by KPMG, and the enactment of a law that requires annual external audits of the national oil company SNPC. Progress has continued in this area with the publication of the 2018 audit report. In addition, the authorities have sent reports to Parliament on (i) pre-financing agreements by SNPC, which were associated with the large increase in public debt; (ii) on infrastructure projects implemented by the Ministry of Public Works, and (iii) on special agreements between the government and companies to build infrastructure financed through in-kind oil payments.

  • Disclosure of Information. The authorities have also taken steps to publish monthly economic data on the websites of the statistics institute and the Ministry of Finance. In addition, the draft 2019 Budget was published online even before the Parliamentary discussion started. This practice is commendable as it allows civil society, the media, and other national and international observers advance access to information to assess government priorities.

  • Independent Audits of Domestic Arrears. Auditing arrears prior to payment is also an important reform to ensure that public resources are only used to settle payments that are associated with an effective delivery of goods and services. International experience suggests that the emergence of a large stock of domestic arrears is often associated with the emergence of collusion and opportunistic behavior between the private sector and public officials.

29. Further steps are needed, however, and some reforms require active follow-up to ensure that they produce effective change. In particular, the anti-corruption framework requires the adoption of implementing decrees and the allocation of adequate budget resources to allow the new institutions to carry out their activities effectively. For example, the authorities should ensure that the High Authority on Corruption is provided with adequate human and material resources, corruption-related offences are systematically investigated and prosecuted, and that the financial disclosure/asset declaration regime is brought into alignment with international good practices. In addition, the three reports that were sent to Parliament on oil revenue management have not yet been broadly discussed. While these reports point to serious inefficiencies in past economic management, an active debate and publication of the information should be pursued to ensure that there is accountability about previous policies.

30. Staff noted the importance of strengthening the PFM system, particularly budget execution, where new vulnerabilities were identified. In particular, the Treasury used in 2019 an opaque mechanism to settle payment orders from previous years. These payment orders from 2015–17 represented about 3 percent of GDP. They should have been classified as domestic arrears, sent to the debt management unit, and audited prior to payment. Instead, the Treasury kept them in a “transitory account” outside of the regular budget control procedures. While the settlement of these arrears was mostly associated with social sectors (student scholarships, health, education and local communities), it crowded out the clearance of other arrears that had already been audited and left the Treasury without sufficient resources to meet social spending targets from the 2019 budget. Staff proposed that the spending and related documentation should be audited by the Audit Court.

31. Discussions also focused on other important reforms that should help improve the efficiency and transparency of public finance management. Staff commended the authorities for their efforts to adopt a new expenditure tracking software (SIGFIP) that will improve the efficiency and transparency of budget execution, by tracking the various phases of the expenditure chain from the commitment to the payment. In addition, the authorities should also expedite plans to: (i) adopt a new organizational structure of the Ministry of Finance and Budget; (ii) design and implement a medium-term strategy for PFM reforms, with a three-year rolling action plan; (iii) prepare a comprehensive list of all government accounts in the banking system and transfer their balances to the Treasury Single Account; and (iv) adopt a Law on the organization and functioning of the Audit Court.

32. The enforcement of legal claims requires further attention. Congo is assessed poorly in the area of claims enforcement. A key complaint is the lack of specialist training within the judiciary. Further efforts in this area, coupled with the publication of judicial decisions would be important first reform steps. The collection of data in relation to the number of proceedings before courts would allow for better resource allocation and could contribute to a decline in delays.

Authorities’ Views

33. The authorities noted that they had implemented a large number of reforms to improve governance. They appreciated the broad recognition to their reform efforts, but pointed out that it will take time for these reforms to produce effective change. They expressed a commitment to allocate adequate budgetary resources to the new anti-corruption institutions, but also explained that it was first important to hire qualified staff who can prepare a business plan, and subsequently submit a specific request for budgetary resources. The authorities also noted that staff advice regarding best international practice should be tailored to country-specific factors and take into account political economy and other institutional constraints. In particular, they indicated that building new effective institutions would be a gradual process that can take some time.

34. The authorities agreed that there was a need to improve the PFM system and highlighted the commitment to adopt the new expenditure-tracking software (SIGFIP). They acknowledged that the mechanism used by the Treasury to settle 3 percent of domestic arrears incurred in past years was not adequate. However, they pointed out that there was no particular opacity in the clearance of these arrears as the details of the spending were known and they quickly accepted staff’s recommendation to have this spending audited by the Audit Court. Going forward, the authorities agreed that the Treasury should only be allowed to settle payment orders from the previous year in January (in line with CEMAC PFM regulations) and then should close the budget year and send any remaining stock of unpaid bills to the debt management unit.

C. Policy Theme 3: Economic Diversification and Inclusive Growth

35. Reigniting growth in the non-oil sectors requires reforms to help diversify the economy and increase its resilience to external shocks. In an economy still dominated by the oil sector, achieving broad-based, sustained and inclusive growth has proven a daunting task, and poverty and inequality have risen since the last household survey, almost 10 years ago. The non-oil sector has not increased its share in GDP over time over the last decade. Cyclical difficulties have remained, compounded by a weak business environment. Diversification remains low, even by regional standards, and has not improved in recent decades (see Annex I).

Text Figure 7.
Text Figure 7.

Republic of Congo: Oil versus Non-Oil Sector, 2005–18

(Share of Red GDP)

Citation: IMF Staff Country Reports 2020, 026; 10.5089/9781513527970.002.A001

Sources: Institut National de la Statistique du Congo and IMF staff calculations.

36. Discussions focused on the three pillars of the authorities’ diversification strategy (human capital, the development of key non-oil sectors, and the business environment). In order to decrease the economy’s reliance on the oil sector and on extractive industries more broadly, the National Development Plan (NDP) targets improved performance and competitiveness in the agricultural, industrial, and tourism sectors. As part of these efforts, the authorities plan to allocate resources to improving infrastructure, including transportation and electricity supply, as well as to increase investment in human capital.

37. The agricultural sector is one of three key sectors targeted via the diversification strategy outlined in Congo’s NDP. While it remains underdeveloped, this sector is an important source of potential growth and its development may contribute to improving food security and decreasing reliance on food imports. The NDP targets the development of infrastructure for transport and production essential to support the agricultural system, as well as improvement of value chains. In addition, in the context of the National Agricultural Investment and Food and Nutrition Security Plan (PNIASAN), the authorities aim to modernize family farming and promote agribusiness by helping small producers’ organizations to access the market and engage with large operators.

38. The forestry sector has been fairly static in recent years, but has growth potential. The authorities suggested that a new $65 million grant from CAFI (the Central Africa Forestry Initiative) will help boost the sector given its push for increased transparency in the adoption of a new forestry law, including the publication of forestry receipts, safeguarding community rights in forest areas, the granting of forestry concessions, and the imposition of fines. The government is trying to develop greater value added in the forestry sector by increasing the rate of domestic processing of logs through measures in the new forestry code (see Annex I).

39. The nascent mining sector is beginning to gain momentum, with notable increases in the export of copper, tin and other metals — mainly to the Chinese market. Moreover, given that this sector requires large investment commitments, it is likely to be a long-term source of economic activity. Congolese mining firm Sapro expects to ramp up output from its Mayoko iron ore project in the coming quarters, having shipped its first ore earlier this year, while Glencore is also targeting iron ore exports over the coming months.

40. Staff stressed the importance of speeding up reforms to improve market regulation and the business environment. The operationalization of the single window for property titling has been a positive step. At the same time, limited progress has been achieved to implement a number of other important reforms, including the simplification of the licensing process, the creation of a national real estate registry, the reduction of costs to start a business, and the reform of administrative fees to facilitate cross-border trade. Such reforms would reduce administrative burdens, improve the business environment and unlock growth potential in promising sectors.

41. The development of the financial sector is essential to support access to credit. Staff recommended expediting the finalization of the interim audit report and the implementation of the domestic arrears repayment strategy in order to reduce private sector NPLs with banks and therefore improve financial sector stability and access to credit. Staff also discussed recent steps taken by the authorities on the recapitalization of two non-systemic banks which have either become insolvent or are in distress and recommended that the authorities should submit their proposed plans to Commission Bancaire de l’Afrique Centrale (COBAC). 8

42. Staff also stressed the need to improve economic statistics to support economic analysis. The authorities have been developing a new GDP series with a change in the base year. With continuing support from STA technical assistance missions, the authorities have agreed with staff that new data series should only be adopted once (i) the quality, consistency and reliability of the data have been established, and (ii) the economic impact of the modifications (including changes in nominal GDP) has been fully assessed.

Authorities’ Views

43. The authorities agreed on the need to boost the non-oil economy and enhance the business environment, which was negatively affected by the severe recession that occurred over 2015–18. They acknowledged that the economic crisis was compounded by the surge in domestic arrears from the government to the private sector and the associated credit crunch in the banking sector. To reduce uncertainty and support the private sector, the authorities agreed to expedite the strategy to clear domestic arrears once the final audit report is fully finalized.

44. The authorities noted that they are taking steps to improve the business environment. This includes simplifying licensing procedures and improving the main public archives through computerization. The authorities also reiterated that other measures to improve the business climate are planned under programs supported by the AfDB and the World Bank with a focus on important areas that have performed poorly in the Doing Business reports of the World Bank.

Staff Appraisal

45. The Republic of Congo continues to face very difficult economic conditions. The overall growth projection in 2019 has been revised down due to a lower increase in the level of oil production than initially anticipated. There are, however, good prospects for a further increase in oil production in 2020, which would help boost growth. The non-oil economy is likely to grow modestly in 2019 (below 1 percent) thanks to developments in the agricultural and transportation sectors, though many economic sectors still remain in recession. The overall macroeconomic outlook remains challenging, and business confidence appears low due to delays in the implementation of the government strategy to clear domestic arrears. However, inflation remains under control and (imputed) net foreign assets have been rising faster than expected due to the improving current account and the impact of the new foreign exchange regulations.

46. The government needs to continue strengthening its medium-term fiscal framework. Prudent expenditure policy in the execution of the 2019 budget through September, and the draft 2020 budget are consistent with the objective of pursuing fiscal consolidation efforts and reducing debt. At the same time, there are three risks that require special focus.

  • First, a substantial part of the fiscal consolidation strategy relies on non-oil revenue mobilization and the authorities should step up efforts to curb exemptions, collect tax arrears and pursue ongoing tax administration efforts, including the planned interconnection among customs, the domestic tax directorate, and the Treasury.9

  • Second, there is a need to ensure that adequate resources are allocated to critical social programs in favor of vulnerable groups. This will require pursuing reforms to contain oil-related subsidies and a stronger system of monitoring priority programs in the cashflow plan by the Treasury.

  • Finally, the authorities need to strengthen their PFM system to ensure that annual budgets are closed in a timely manner, and the Treasury only settles domestic arrears from previous budget years after they have been properly recorded (and audited) by the debt management unit or an independent audit.

47. Public debt management should continue to be at the center of Congo’s economic recovery plan. First, staff support authorities’ plan to pursue negotiations with external commercial creditors to reduce the current debt burden and ensure that Congo reaches a moderate level of debt distress by 2023. Second, the authorities should implement the strategy to clear domestic arrears with the private sector. This is essential to contain rising non-performing loans, provide enough liquidity to the private sector to be able to meet its tax obligations, and increase business confidence in support of economic activity, especially in the non-oil sector. The authorities should also avoid any new accumulation of official external arrears and clear the existing stock in line with their earlier commitments.

48. Congo has taken steps to improve governance and reduce corruption. Staff welcomed the authorities’ efforts to strengthen the anti-corruption framework, improve transparency in the management and accounting of oil revenues, and increase access to economic information, including through the publication of the 2018 audited financial statements of SNPC and the publication of the draft 2020 budget in the website of the Ministry of Finance. At the same time, additional efforts are needed to ensure that these reforms are fully implemented, including through the adoption of implementing decrees for the High Authority on Corruption and for the Transparency Commission, as well as ensuring that the newly created institutions are properly resourced and able to perform their roles.

49. Congo’s growth model has been too dependent on developments in the oil sector and the diversification strategy will be key to sustain higher and more inclusive growth. The level of diversification remains low (see Annex I). The success of the strategy will require a focus on two interrelated priorities. First, the country needs to preserve macroeconomic stability; the restoration of debt sustainability through a successful debt restructuring of external commercial debt and the repayment of external and domestic arrears will be essential to boost confidence and signal that the country will be able to maintain a stable economic environment. Second, institutional reforms to strengthen governance and improve the business environment can also play a decisive role. In this regard, improving the quality of infrastructure (including access to electricity), reducing administrative challenges associated with starting a new business, and improving access to credit are essential to bringing Congo more in line with better performers in Sub-Saharan Africa.

50. It is recommended that the next Article IV consultation be held in accordance with Decision No. 14747- (10/96), adopted September 28, 2010, as amended.

Table 2a.

Republic of Congo: Central Government Operations, 2018–24

(Billions of CFA francs)

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Sources: Congolese authorities; and IMF staff estimates and projections.

Includes net spending (i.e. spending minus revenues) associated with decentralized government entities.

Revenue and grants excluding oil revenues minus total primary expenditures (excluding interest payments).

Non oil revenue excluding grants minus total expenditures excluding interest payments and foreign-financed investment.

Basic non-oil primary balance minus oil revenue and oil-related transfers. This is a Performance Criterion/Indicative Target.

CEMAC definition: overall balance minus 20 percent of oil revenues and minus 80 percent of the oil revenue in excess of the average observed during the three previous yea

Post-HIPC external arrears accumulated since 2016 are consolidated in outstanding debt. The projected repayments are included in amortization of external debt.

Projected repayments of domestic arrears are included in domestic financing.

Includes estimates of domestic arrears audited by the the Caisse Congolaise d’Amortisation (CCA) and reported but not yet audited arrears.

Net of restructured contingent liabilities.

Table 2b.

Republic of Congo: Central Government Operations, 2018–24

(Percent of non-oil GDP)

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Sources: Congolese authorities; and IMF staff estimates and projections.

Includes net spending (i.e. spending minus revenues) associated with decentralized government entities.

Revenue and grants excluding oil revenues minus total primary expenditures (excluding interest payments).

Non oil revenue excluding grants minus total expenditures excluding interest payments and foreign-financed investment.

Basic non-oil primary balance minus oil revenue and oil-related transfers. This is a Performance Criterion/Indicative Target.

CEMAC definition: overall balance minus 20 percent of oil revenues and minus 80 percent of the oil revenue in excess of the average observed during the three previous years.

Post-HIPC external arrears accumulated since 2016 are consolidated in outstanding debt. The projected repayments are included in amortization of external debt.

Projected repayments of domestic arrears are included in domestic financing.

Includes estimates of domestic arrears audited by the the Caisse Congolaise d’Amortisation (CCA) and reported but not yet audited arrears.

Net of restructured contingent liabilities.

Table 2c.

Republic of Congo: Central Government Operations, 2017–24

(Percent of GDP)

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Sources: Congolese authorities; and IMF staff estimates and projections.

Includes net spending (i.e. spending minus revenues) associated with decentralized government entities.

Revenue and grants excluding oil revenues minus total primary expenditures (excluding interest payments).

Non oil revenue excluding grants minus total expenditures excluding interest payments and foreign-financed investment.

Basic non-oil primary balance minus oil revenue and oil-related transfers. This is a Performance Criterion/Indicative Target.

CEMAC definition: overall balance minus 20 percent of oil revenues and minus 80 percent of the oil revenue in excess of the average observed during the three previous years.

Post-HIPC external arrears accumulated since 2016 are consolidated in outstanding debt. The projected repayments are included in amortization of external debt.

Projected repayments of domestic arrears are included in domestic financing.

Includes estimates of domestic arrears audited by the the Caisse Congolaise d’Amortisation (CCA) and reported but not yet audited arrears.

Net of restructured contingent liabilities.